CMBS Players Discuss Changing Market, Structures

Commercial mortgage and multifamily bankers at the Mortgage Bankers Associations' annual convention grappled last week with the issues of rapid consolidation, different ways to increase portfolio investors' liquidity, and the advantages of issuing in the private market - describing a commercial mortgage industry that is "morphing" into something completely different then what it was at its peak in 1997.

In an attempt to describe what will set the standards in the commercial mortgage-backed industry over the next few years, mortgage bankers discussed the impact of strategic tools on the their business, and suggested new bond structures and issuing methods that may have advantages over traditional Wall Street CMBS.

"Are there valuable alternatives to a Wall Street CMBS execution or a direct sale? Yes, there are viable efficient alternatives," said Stuart Salins, senior vice president of Northfield-Ill.-based Newman & Associates, a subsidiary of GMAC Commercial Mortgage that underwrites both structured and non-structured securitizations. "There are innovative private transactions encompassing a variety of structures, including non-rated securitizations, senior subordinated participations sales, and parri passu sales."

According to Salins and several other panelists speaking at a session about the portfolio management of commercial loans, doing a secondary market commercial deal in the private placement market affords the seller/issuer a flexibility that cannot exist in traditional CMBS transactions.

"How many times will a borrower come to a lender and ask for additional money to expand his property?," Salins asked the audience. "In a [typical] securitization, it won't happen; it is restricted under Remic laws and under pooling and servicing transactions. But in a private transaction, we can overcome that and negotiate points like that between the buyer and the seller."

"This market seems to have run out of gas and may be at the point of seizure," added Mark Fisher, vice president of Portland, Ore.-based Standard Mortgage Investors LLC, referring to the need for alternatives to traditional CMBS structures.

Salins' company, Newman & Associates, represents life insurance companies in private commercial mortgage secondary market transactions. Over the past few years, the company has "consummated a couple of billion dollars," Salins said, tailoring the type of structure to the needs of the client.

One of the most popular private CMBS structures is of the "private, non-rated" variety, Salins explained. While it is rather closely akin to traditional CMBS transactions, the private type are not rated. Instead, the investor makes his or her own assessments as to the overall quality and the amount of subordination. Moreover, private securitizations are much smaller than CMBS - Salins has completed deals as small as $75 million. Finally, private securitizations are not multi-tranched, but instead have a simple senior subordinated structure.

Another one of Salins' favorite alternative structures is the senior subordinated participation sale. In this structure, the transaction is not pooled, but what is sold is the senior and/or subordinated interest in each individual loan that comprises a portfolio.

"When you do a private placement transaction, you can put in many more provisions," Salins added. "It just makes sense."

An Evolution

At a CMBS session exploring the changes in the commercial/multifamily industry over time, panelists predicted continued consolidation in the life insurance industry and the use of securitization to handle diversification needs in order for these companies to actively manage portfolios.

"Back in 1997, the [mortgage] industry was recognizing CMBS as a major force," said Gregory Longoria, the director of Chicago-based FPL Associates. "But now the psychology has changed. Competition is growing for lenders. So, now, we must ask ourselves, What is the right business model for us?'"

"There has been a fallout in the conduit world," added Deborah McAneny, the president of John Hancock Real Estate Finance Inc. in Boston. "There is a lot less business around, and only players with strategic reasons to be in the business are still there."

Kevin Riordan, managing director at Teachers Insurance & Annuity Association, said that only a strong bond between life insurance companies and the Street will improve liquidity in the market and concentrating on loans between $1 million and $3 million.

"The Street is risk-averse," Riordan explained to the audience. "The CMBS vehicle for $1 million to $3 million loans is a good vehicle. The sector is financed out now. Rates are up, and spreads are up; the business will eventually go to the floating market."

Finally, the panel made the point that the focus going forward must be on the borrower and on the relationship between the lender and correspondent: Mortgage bankers must better understand the capital needs of a borrower, and why they are borrowing money.

"This leads to more consolidation in the marketplace," Riordan commented. "The changes are healthy and positive, and good for our industry."

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